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When Illinois raised its sports betting tax this summer, it created a huge stink. At first, it was all talk. But after a few months of huffing and puffing, DraftKings did respond after all. Not by leaving the state, but by raising taxes of their own — until they didn’t.
Here’s the story about DraftKings about-face in Illinois in two weeks time. This is a fun one:
DraftKings Raises Its Own Taxes
At the start of August, DraftKings dropped an absolute bombshell: they would begin taking a cut of players’ profits. Yes, a surcharge tacked on to winning bets.
Shocking cause no one else in the industry does such a thing. These hidden fees are commonplace in other industries — hotels and airlines, for example — but not betting marketplaces. The charge would apply strictly to states that tax their revenue high, which includes Illinois, New York, Pennsylvania, and Vermont. The four states met the criteria of tax rates higher than 20 percent.
Illinois was under the threshold just a few months ago. Originally, they taxed sports betting flat at 15 percent. However, they now have a tiered system that ranges from 20 to 40 percent. DraftKings has big enough revenues in Illinois that they get the 40-percent tax rate — a startling amount if we’re being honest.
DraftKings stock tanked by double digits the day Illinois announced the tax change. Investors panicked that this would be the new normal as more and more states face budget deficits. So in a way, this was DraftKings’ response to that panic.
The surcharge was described as “nominal” by DraftKings CEO Jason Robins. In their announcement, they used Illinois as an example of how it would work. Say a $10 bet was won on an Illinois betting app at +100 odds, which nets $10 profit. Welp, DraftKings would pony up just $9.68 instead of $10, after a 32-cent “Illinois gaming tax surcharge.” The tax rate would vary by state — betting in New York would be higher since it has a 51-percent tax.
Of course, there was A LOT of backlash on the move — most of it negative as you’d expect. Bettors sure weren’t happy about the odds effectively being stacked against them more than they already are. It already takes a 52 win percentage just to break even (on -110 bets) so another surcharge moves that to 53 percent or so. Not ideal.
DraftKings Rescinds Surcharge Decision
If we’re being honest, DraftKings cared about one response more than anything else. Not bettors. Not Illinois lawmakers. But that of fellow bookmakers. Would they follow suit? Or would they disavow DraftKing’s choice?
Well, it turned out to be the latter. FanDuel, ESPN BET, and BetRivers all came out publically and said they would be doing no such thing. Even then, it’s the FanDuel response that holds the most weight.
Let’s face it, both DraftKings and FanDuel have won the sports betting war. The two bitter rivals own a 65% market share in the United States (revenue-wise), according to the latest report from Eilers & Krejcik Gaming. BetMGM is way behind both with only 19% of revenue. So this industry is a duopoly in a sense.
There is no way DraftKings makes decisions, especially of the magnitude of a surcharge, without side-eyeing FanDuel. No way. And the same goes vice-versa. Each company is eyeing the other’s moves step for step. So when FanDuel declined to copy them then with betting tax, DraftKings did a U-turn. It’s probably not a coincidence that DraftKings made their cancellation announcement two hours after FanDuel’s quarterly earnings where it rejected the idea in the call with investors.
“We always listen to our customers and after hearing their feedback we have decided not to move forward with the gaming tax surcharge,” the company said in a statement. “We have always committed to delivering the best value in the industry to our loyal customers.”
Our translation: “since FanDuel didn’t do it, neither did we. But hey, at least we tried. If only FanDuel hadn’t chickened out…”
If these competitors were more friendly with each other, we could see them in cahoots to make a surcharge the norm. They certainly have the influence to create such a trend. But at the same time, betting is a commodity. Most of these platforms offer the same exact product — just with a different skin and promos. But the bets are the same.
If the two top players start taxing players, the door is left open for BetMGM or Caesars to come out as the non-surcharge bookie and makeup market share. That’s obviously a risk FanDuel didn’t want to take.
Instead, FanDuel has other plans to make up for losses in high-tax betting states like Illinois. During the same quarterly call, they hinted at fewer promotions. “Moderating levels of generosity” and “reducing local marketing is the best customer option” they said.
Bettors dodged a bullet here, but no thanks to greedy states like Illinois. We’ll just have to see how else this tug-of-war between operators and states plays out. Something tells us the game is only just beginning.
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